As the various Fed whisperers try to influence President Joseph Biden’s decision on who should head the US central bank, the consensus seems to be growing that Jerome Powell will be appointed to a second term as chairman because it will be easier to get his nomination through the Senate with broader Republican support.
The alternative, Lael Brainard, the sole Democrat currently on the Fed’s board of governors, would be more divisive and invite a vote on partisan lines. But politics in the US is so toxic at this point it’s hard to know where Biden and his advisers will settle. They haven’t been right very often, as evidenced by the President’s plunging approval ratings.
Mixed Opinions, No Clear Solutions
In the meantime, there is the small matter of raging inflation and its impact on monetary policy. Fed Vice Chairman Richard Clarida—whose board term ends in January and who is unlikely to be renominated—suggested last week that the Federal Open Market Committee should consider a faster pace for reducing its bond purchases when it meets in mid-December.
On the other hand, some FOMC members seemed content to toe the Fed’s line of wait and see. Richmond Fed President Thomas Barkin said it would be “very helpful for us to have a few more months to evaluate” inflation trends. The feeling is the Fed will have to finish the taper before it moves on to hike rates.
San Francisco Fed President Mary Daly reiterated her warning last week against a rate hike to curb inflation.
“Pre-emptive action isn’t free.”
She blamed supply-side disruption for higher prices, saying an interest-rate hike wouldn’t fix that issue but would slow demand and job growth.
John Williams, the head of the New York Fed, defended the central bank’s shift to a flexible target on inflation, saying it is “well suited” to the pandemic-related mismatch between supply and demand. He added, though, that policymakers would not like to see long-term expectations for inflation to move up significantly.
But Barkin’s predecessor at the Richmond bank, Jeffrey Lacker, felt less constrained by the reigning dovish mentality among policymakers. He said the Fed is “way out of bounds” in waiting on inflation, adding:
“I think they are on track to a major policy blunder.”
William Dudley, who preceded Williams as head of the New York Fed, said the FOMC is “pretty late” in reacting to inflation. Dudley held the pivotal New York position for more than nine years until mid-2018 and was a permanent voting member of the FOMC. He and Lacker both felt the central bank will have to raise short-term rates to more than 3% to rein in inflation.
Other current FOMC members are becoming uneasy as inflation increases month after month. Chicago Fed chief Charles Evans says he is becoming more open to hiking interest rates sometime next year if employment improves and inflation continues. Atlanta Fed President Raphael Bostic said the committee could start raising rates in the summer, presuming the job market continues to grow.
James Bullard, the St. Louis Fed chief who has been more outspoken about the need to nip inflation in the bud, repeated his call for the FOMC to “tack in a more hawkish direction” to avoid the need for more drastic action down the road.
Biden is expected to make an announcement on Fed nominations early this week before he leaves for his Thanksgiving vacation. If he does renominate Powell as chair, he will probably give Brainard one of the two vice-chairmanships coming vacant and appoint as many as three more progressives to the board, shifting the balance in their favor.
The thinking is that will soften the blow for the progressives while preserving some continuity at the Fed. Appointing Brainard to the top position could entail a wholesale realignment with only three of the present board likely to remain on the seven-member panel.